Every business listing arrives with a profit and loss statement, and almost every one of them was prepared by the seller's broker. This is the order I work through when I read one, and the questions I ask when the numbers do not hold up.

Brokers don't lie. They curate.

The first thing to understand about a broker-prepared P&L is that it is a marketing document. That doesn't mean it's fraudulent — it means every discretionary judgment in it was resolved in the seller's favor. Your job as a buyer is to reverse those judgments, one line at a time, until the P&L reflects what the business actually puts in an owner's pocket.

Here is the framework, in the order it should be done.

1. Get three years, minimum — never one

A single year of operating data cannot support a valuation. One year hides seasonality, hides a lucky quarter, and hides a business that was propped up for the sale. If a seller provides only one year of P&Ls, treat the business as speculative until you see year two and three. In practice, this one rule filters out a surprising share of marketplace listings.

2. Reconcile the P&L against tax returns

The tax return is the only financial statement the seller sent to the government under penalty. The broker P&L is not. Where the two disagree, believe the tax return and ask the seller to explain the difference. Small gaps are normal (timing, legitimate add-backs). Large, systematic gaps are the single most reliable indicator of a misleading seller narrative.

3. Audit the add-backs — this is where the games happen

"Add-backs" are expenses the seller claims a new owner won't have: personal vehicles, family members on payroll, one-time legal fees, that trip to a conference in Cancun. Add-back inflation is the most common form of P&L manipulation in small business sales. Three tests for every add-back:

  • Is it actually personal? A vehicle used by a working manager is not an add-back.
  • Is it actually one-time? Ask for the prior three years — if the "one-time" expense appears in each of them, it's recurring.
  • Does it survive the sale? An expense that returns under new ownership (e.g., a below-market lease that resets) can't be added back.

Recompute cash flow with only the add-backs that pass all three tests. This is your real SDE baseline.

4. Watch for the treadmill effect

The treadmill effect is when ad spend grows faster than the revenue it buys. Pull marketing spend and revenue side by side across all available years. If marketing costs doubled while revenue grew 15%, the business is buying its own revenue at rising prices — and the moment a new owner eases off, revenue falls. This pattern is extremely common in e-commerce and paid-social businesses, and it is a structural risk, not a fixable one.

5. Check revenue concentration and mix

Ten customers at 10% each is a business; one customer at 55% is an employment contract with your buyer. Look for customer concentration, platform concentration (one marketplace, one ad channel), and whether "recurring" revenue actually renews. Normalize your offer price for concentration risk.

6. Verify the operational math

Cross-check headcount against revenue. A service business showing $1M+ revenue on one or two employees is either a miracle or an owner-operator dependency in disguise — and the owner leaves at closing. Ask who does the work the P&L implies gets done.

7. Narratives to distrust on sight

Some broker explanations are themselves red flags. A multi-year revenue decline blamed on "weather" (verifiable — check the actual weather records for the market), a decline blamed on the "current administration" or "the economy" while competitors grew, or any story where the seller is never responsible for any number. Lack of accountability in the narrative predicts lack of transparency in the books.

What you should have at the end

You should have: a normalized SDE you can defend line by line, a trend across at least three years, reconciliation against the tax return, and a short list of questions for the seller where the numbers didn't hold up. That document — not the broker's one-pager — is what you take into negotiations.

Tools

You can do all of this in a spreadsheet if you have the patience for it. Dedicated analysis tools can compress it: DealQA (dealqa.com) runs year-over-year trend analysis on an uploaded broker P&L, flags inflated add-back patterns and revenue-concentration risk, and generates a formal report you can attach to a listing in your pipeline. Whether you use a tool or a spreadsheet, the framework is the same: normalize, reconcile, and never accept the curated version.